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Free Minds & Free Markets

How Quantitative Easing Helps the Rich and Soaks the Rest of Us

And why the Occupy movement should be up in arms.

The decision is in: Unlimited quantitative easing. That was the announcement from the Federal Open Market Committee this afternoon, launching a third round of purchases of securities in a bid to boost the economy and reduce unemployment. This time, Federal Reserve Chairman Ben Bernanke and crew are pledging to buy $40 billion per month until the economy improves. The Fed's policy committee also extended its zero-interest rate policy until “at least mid-2015.” If QE3 lasts that long, the Feds will be printing at least another $800 billion to buy mortgage-backed securities.   

It won’t be a surprise to read conservatives lambasting this as unconventional monetary policy meant to help re-elect President Obama. And inflation hawks have already started screeching. But the loudest cry of “for shame” should be coming from the Occupy Wall Street movement.

Quantitative easing—a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages—is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality formed by crony capitalism. And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy.

How is the Federal Reserve contributing to regressive redistribution, income inequality, and manipulated markets? Let’s flesh this out a bit.

Last month, Bernanke said that quantitative easing had contributed to the rebound in stock prices over the past few years, and suggested this was a positive outcome. “This effect is potentially important, because stock values affect both consumption and investment decisions,” he argued, apparently under the belief that the Fed has a third mandate to support rising stock prices.

This is ironically a trickle down monetary policy theory, where rising stock prices mean more wealth and more consumption that trickles down the economic ladder. One problem with this idea is that there is a gigantic mountain of household debt—about $12 trillion worth—that is diverting away any trickle down. An even worse assumption is that the stock market really reflects what is going on in the real economy.

Where the Occupy movement should really be teed off is when you consider that most equity shares in America are owned by the wealthiest 10 percent. That is not inherently a problem—wealthier individuals with more disposable income will have more ability take ownership stakes in companies than those in lower income brackets. And it is not a call for class warfare. However, it does mean that when the Fed engages in quantitative easing it is providing a benefit to a very narrow segment of society at the expense of others (either through future inflation or through the cost of raising taxes to pay for increased federal debts). That is the definition of crony capitalism.

At the same time, all Americans have seen the prices of basic goods increase over the past few years in large part due to rising commodities prices. The whole idea of QE is to drive investors out of lower risk investments like mortgage backed securities and government debt and get them to put that money in “more productive” use—lend it, build skyscrapers, invest in technology, etc. Since there is little confidence about the future of the economy, many investors have crowded into the stock market with their money, and still others have invested in commodities.

The problem is that investing in commodities can push up prices on things like gas, meat (because of feed corn prices), bread (because of wheat prices), and even orange juice. There certainly have been other contributors to commodities prices going up, but if the Fed has boosted stocks, they've boosted commodities too. So not only are the cronies gaining from quantitative easing, there is a negative wealth effect too.

The cronyism doesn’t end there. In a Dallas Fed paper released in August, OPEC chief economist William White points out that easy monetary policy favors “senior management of banks in particular.” And even Bernanke himself suggested (as if it was a good thing) that quantitative easing purchases “have been found to be associated with significant declines in the yields on both corporate bonds and MBS.” Translation: the Federal Reserve has made it artificially cheaper for corporations to borrow money and has pushed up the prices of houses (benefiting homeowners but hurting homebuyers).

Correct me if I’m wrong, but I thought cheap loans allowing businesses to leverage up and juiced housing prices were key parts of what got us into this mess?

All of this might be acceptable to some if quantitative easing was helping the American economy recover. The reality is that quantitative easing has made it cheaper for the government to borrow, has artificially propped up the housing market (making it take longer to recover), and has dramatically manipulated the distribution of capital in financial markets. And the economy has not been in recovery.

The plans announced today will exacerbate pre-existing malinvestment and income inequality. What is this continuous round of purchases going to do? It won’t get banks lending any more than they already are. And even if it did, households and small business still have a lot of debt that will keep them in a deleveraging state for a while. It won’t help the housing market bottom out, clear away toxic debt, and end the wave of foreclosures that need to process. It is not going to push up incomes, create new jobs, or change the technological revolution that is altering the face of employment in America.

To put it simply: More quantitative easing is not going to move the dial much on the growth meter.

Taken together, the crony capitalism and negative wealth effects of quantitative easing should clearly give pause. The fact that QE promotes activities that led to the housing bubble should have stopped its progression as an idea a long time ago, especially since these problems are greater than any gain that would come from this now perpetual pace of money creation.

If there is a time to head down to Zuccotti Park and raise some cardboard in opposition to the continuation of such a devastatingly failed policy, it is now.

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  • Pagan Priestess||

    The Beatings will continue until morale improves!

  • BCanuck||

    Thank you sir, may have another?!

  • Pro Libertate||

    I wrote a song about this in the earlier QE3 thread.

  • Rich||

    This time, Ben Bernanke and crew are pledging to buy $40 billion per month until the economy improves.

    Why not make it $400 billion per month and improve the economy faster?

  • ||

    Ever heard the one about the frog in the pot of water?

  • Pro Libertate||

    What's funny is that I heard that at Sunday school about forty years ago. A Methodist church gave me a great metaphor for the decline I didn't know was coming.

  • ||

    I mean, we've really just eased (sorry) into the next stage of this. The temp went up a couple degrees, but not enough to notice. The monthly amount will be increasing down the line, of course, just to goose the economy a little more.

  • Pro Libertate||

    I've always liked the analogy, especially when it comes to government crapping all over us, a little more at a time.

    Supposedly, a frog won't really sit in a pot slowly turned to a boil until it dies, but screw that--I like the story too much. Besides, all it takes is one slow-moving frog out of many difference species to make it true. Seems to work with people, anyway.

  • Almanian's Evil Twin||

    I used this analogy just yesterday re: getting the Union to agree to some changes we need to implement. "Don't throw them in a hot pot - put 'em in cold water and turn on the heat. Boilled frog."

    We noted the "slowest gazelle" parable this morning in regard to "not being one".

    Oldies but goodies!

  • hk||

    Lol, nice.

  • T o n y||

    So what do you guys have to offer in the way of a more progressive method? Nothing, right?

    The Fed has always said that the most productive action must come from Congress. But as Congress's current job is to make the country as weak as possible for petty partisan gain, this is what we get.

  • Almanian's Evil Twin||

    a more progressive method? Nothing, right?

    You're right - doing nothing would be more progressive.

    You got one right, Choney!

  • ||

    Doing nothing is better then doing something that we know hurts the economy and redistributes wealth from the poorest to the richest.

  • ||

    So what do you guys have to offer in the way of a more progressive method? Nothing, right?

    1. Student loans fully dischargeable in bankruptcy.

    2. Principal write-downs on underwater mortgages.

    3. Insolvent banks and financial institutions are allowed to fail.

    You have to get the debt burden of ordinary folks down to get the economy restarted, assuming a restarted economy doesn't cause oil prices to fly through the roof. You do that by helping ordinary folks get out of debt and letting their paymasters take the hit for a change.

  • hk||

    #3 is my favorite.

    You could have just said though, "stop Keynesian economics". Much shorter.

  • Randian||

    1. Student loans fully dischargeable in bankruptcy.

    No.

  • Fluffy||

    Why not?

    All debts should be dischargeable in bankruptcy, including accrued child support and federal tax liens, or we shouldn't have bankruptcy at all.

    And all social systems that don't include bankruptcy devolve towards chattel slavery. All of them.

  • Pro Libertate||

    Yes, I think they should be dischargeable, too. At least going forward. The fact is, the loans need to be priced for risk, including the risk of bankruptcy and default. Without that, we get the bubble and other chaos we have today.

  • Tulpa Doom||

    If you make student loans just like any other debt, there will be no student loans anymore. Except for rich kids whose parents will cosign.

  • VG Zaytsev||

    That's the point.

    The real beneficiaries of student debt are empire building administrators and super star professors. Neither of which helps to educate individual students. (Actually they both actively hinder education but that's another issue).

  • Drake||

    That's fine as long as they aren't borrowing my tax and debt dollars.

  • Pro Libertate||

    Not necessarily, though I do think reforms like this can wait until the bubble bursts. Which should be relatively soon.

  • Zombie Jimbo||

    Dischargable, but the Student has to pay 30%, the bank who lent the student the money s/he pissed away on a useless degree pays 30%, the overpriced university that failed to educate the student pays 30%, and I, the magnanimous taxpayer, will kick in 10%.

  • Drave Robber||

    You have to get the debt burden of ordinary folks down to get the economy restarted, assuming a restarted economy doesn't cause oil prices to fly through the roof.


    A restarted economy would blow all prices through the roof, not just oil. This is the reason economy will likely be not allowed to restart, even if it was about to restart itself.

    An attempt to restart the economy was one of factors that brought down Soviet Union, after all.

  • Emmerson Biggins||

    yes on #1 and #3. No on #2.

    Allthough if #3 were reality, #2 would happen voluntarily a lot more than it does now

  • Tim Cavanaugh||

    Exactly. Anybody who's either shopping for a home or paying his or her mortgage on time should be irate at the idea of anybody getting a principal writedown for a public loss.

  • ant1sthenes||

    Fuck #1. That lets students and schools off the hook. That said, I'm fine with allowing it under two conditions:
    1. The school, being more responsible for the student's income problems than the lender, must pay half the remaining principle.
    2. The student's degree is nullified. You can't take away actual knowledge or skill, but you can sure as shit repo a credential. It's doubly good because students that attend school to become educated lose nothing, while students who are paying hundreds of thousands of dollars for a title of minor nobility get fucked like they so richly deserve.

  • Zombie Jimbo||

    I like this better than my previous comment. The thought of repossessing a credential never occurred to me. Maybe electroshock can get rid of the statist indoctrination that comes with the credential.

  • R C Dean||

    Look, T, what Bernank is doing here is buying garbage CMOs from money center banks to repair their balance sheets and going tits up.

    The obvious alternative, of course, is to let them fail.

    Why do you support impoverishing people on fixed incomes in order to enrich the bankers, T? Why?

  • R C Dean||

    repair their balance sheets and keep them from going going tits up.

    I blame Freud. Or Bush. Or maybe global warming.

  • Pro Libertate||

    LET. . .FAILURES. . .FAIL.

  • Restoras||

    Why do you support impoverishing people on fixed incomes in order to enrich the bankers, T? Why?

    Because he is a slaver statist douchebag that took all the indoctrination he received so good and hard it forced his brains out of his nostrils.

  • John Thacker||

    With what inflation, exactly? We've had inflation consistently below the Fed's target.

    Why do you support impoverishing private sector non-union workers in order to enrich the public sector workers, RC? Why? Because that's what happens when you let the nominal amount of GDP fall below trend, and some workers have long term contracts promising wage increases on the old trend line, and other don't.

  • PM||

    We've had inflation consistently below the Fed's target.

    As long as you trust the CPI. Heck, it's compiled by the government, and they have no incentive to hide inflation, so it must be true!

    Also, the Fed's target can be 900% inflation and as long as we meet it, nothing's wrong?

  • Calidissident||

  • Calidissident||

    Damn you squirrels

    http://memedepot.com/view/207

  • John Thacker||

    The Fed is wrong. The most productive action must come from the Fed, as New Keynesians used to know as well as Ben Bernanke when they were criticizing Japan.

    Monetary action is much better than fiscal action. The Fed has been insufficient so far, but this action was a good one on the whole.

  • PM||

    Yeah, that's always been the problem. Not printing enough darn money! Robert Mugabe for Fed Chairman!

  • Death Rock and Skull||

    Hopefully sooner rather than later the pot will be boiling over and the frog will be dead, its skin blistered and peeling off. This is what happens.

  • Pro Libertate||

    That, or the frog will develop superpowers. That's what some seem to be hoping.

  • Almanian's Evil Twin||

    I, for one, welcome our future superpower frog overlord

  • hk||

    Wow socialists are clueless.

    QE is the equivalent of sub-prime mortgage lending, and it represents everything that is wrong with central banking.

  • KPres||

    Well, you may clueless about what socialists actually want. QE may be all those things, but their interested in it being done by a government controlled institution, as opposed to private, market-based institutions.

  • R C Dean||

    Its not the equivalent of sub-prime mortgages. Its actual, literal, stuffing of our central bank with sub-prime mortgages. This program is designed to back the US Dollar with sub-prime mortgages.

    What could possibly go wrong?

  • Restoras||

    Nothing can go wrong if you are a statist since the end result will be more power in the hands of the state.

  • sasob||

    This program is designed to back the US Dollar with sub-prime mortgages.

    In other words the Dollar is being backed with debt. But a One Dollar Federal Reserve Note itself is just an IOU as well. So if you have a One Dollar Federal Reserve Note, you are owed a dollar's worth of IOUs. Have I pretty much got that right?

  • Nephi||

    I've been having a recurring nightmare lately where, as soon as I retire, the flying inflation monkeys come home to roost, and I use up my entire nest egg in a matter of weeks.

  • Raven Nation||

    In a way it's already happening. If you follow a lot of financial advisors and have 3-6 months worth of emergency funds sitting in a deposit account, you're pretty much losing money.

  • Fluffy||

    Here's the other thing about this:

    QE is designed to lower rates without lowering the Fed Funds rate, by increasing the price of debt securities (higher debt security prices = lower rates).

    Well, just today I saw a NY Times article wondering aloud why, "all of a sudden", private equity firms own the largest percentage of the economy they've ever owned.

    Now, a lot of that is Sarbanes-Oxley making public company ownership structures less attractive.

    But some of it has GOT to be our policy, going back to 2001 now, of holding interest rates too low.

    Fed money center banks, and the people they are willing to lend to (i.e. Mitt Romney and his associates, or others like them) are handed billions of dollars at rates structurally below what the market would grant them in the absence of Fed action. They can use that money to buy other assets, at a cost-of-capital advantage over all other purchasers. Is anyone really surprised that they're using this cost-of-capital advantage to buy a lot of fixed assets and a lot of existing firms? Why is this a surprise to anyone?

  • Restoras||

    That's a great observation. The only hole I see in your arguement is that in the fantasy land of policy makers, especially lefty ones, there is no such thing as unintended consequences.

  • fish||

    ....in the fantasy land of policy makers, especially lefty ones, there is no such thing as unintended consequences.

    What's unintended about any of this? Politicians intend to collect campaign contributions for being compliant in the face of this stupidity. Evil KORPORATIONZ intend to use the cheap money to buy tangible assets and repay in vastly cheaper dollars!

    See! Everything just as it was intended!

  • John Thacker||

    QE is designed to raise long term rates. It does, in fact, raise long term rates.

    Which is good, because bond yields right now are, after inflation and taxes, negative.

  • John Thacker||

    Of course, not that the Fed really knows what they're doing or why. But QE is appropriate.

    So is lowering the interest rate on excess reserves.

  • John Thacker||

    QE is designed to increase the amount of money in circulation (not just money supply.) Rates are a tool designed to achieve that, by adjusting how people want to hold and spend money. Rates aren't the point, they're a tool.

  • jcw||

    aren't banks sitting on trillions of dollars already?

    What's 40b more a month going to change?

  • NihilistZerO||

    Excellent observation. i live in teh LA area and was unsurprised the Dodgers sold for 2 Billion dollars. The rigging of our economy via monetary policy is reaching "Aaron Russo predicted" levels.

    I originally thought his movie America: Freedom to Fascism was a little out there with the conspiracy jargon. Now I'm not so sure...

  • sasob||

    I'm sure the Fed will do whatever it can to keep real estate prices up - think what sinking market values would do to the property tax base of local and state governments. How else could they afford a large, highly paid public employee work force? How would they keep their employee pension commitments? How would they pay off their bond issues?

  • Average Joe||

    I appreciate the article. I would like to add that knee jerk reactions by our government have resulted in implementing some extreme bank regulations that make it more difficult for households and businesses to borrow money. No doubt this was due to poor lending decisions that put depositors in a harrowing situation. However, there is a middle road that can protect the customer while allowing institutions the ability to lend money that would truly help companies the opportunity to succeed.

  • Francisco||

    Duncan notes that there is massive support for medical marijuana with 77 percent of Californians supporting the regulation and control of medical cannabis. Unfortunately this support may not be enough.

  • ||

    Indeed. The original idea of Keynes was that the public sector could take on debt to ease the pain of contractions, and make up for it by reducing debt during expansions. That by itself makes sense, at least to me. But no one does it that way(except maybe Clinton, and he, under duress and blessed by a booming economy).

    What we have is a way to make money cheaper, more available, for those with the most money already, while also making money harder to afford for every one else. And that's just in the short run.

    In the longer run, the value of the currency itself with further diminish, as will any reason for saving and investing. Why should someone delay or avoid buying personal toys in order to accumulate money, for the purpose of a productive and hopefully profitable investment, if the value of the money returned will be less than the value of the money saved? Well, they just won't.

    Unless the government itself proposes to be Investor- and Employer-in-Chief, we won't see investment or employment grow. And the likelihood of benefit from the government openly assuming economic leadership is quite low...

  • wiwnsdfk||

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  • Peabo||

    You know, I've got iTunes U on my phone, and I "take" a lot of courses from legit universities. I like doing it, it's fun to learn new things. The best part is that it's costing me just what my phone bill costs. I end up with a little more knowledge, and no huge student loan to pay back. I'm still going to make sure my kids understand that having a skill like plumbing or electrician...ing...is far more valuable and timeless than a degree in Chicano Studies.

  • Seth||

    Anthony,

    Why doesn't the Fed use QE to pay off the Government's debt? To invest in infrastructure or pay out as a citizen's dividend with everyone's tax returns in order to stimulate consumption... surely that would wildly boost jobs and reduce inequality, yes?

    Is there any precedent for this? Are there any policy makers discussing this?

  • Sbobet||

    Wow, $40 billion per month, its amazing

  • sbobet agent||

    well this economy problem is happen everywhere. and its a common fact that for one man to be rich, it means many people need to be poor.
    thats the cycle that cant be undone in an instant.

  • ibcbet||

    that's always been the problem.Why doesn't the Fed use QE to pay off the Government's debt?

  • ibcbet||

    $40 billion per month.. hahahahaha.. amazing

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